What I’m Watching This Week – 13 August 2018

The Markets (as of market close August 10, 2018)

Despite the continued strength shown in corporate earnings reports, investors reeled in their enthusiasm last week, sending the large caps of both the S&P 500 and the Dow plummeting. Ongoing tensions between China, Russia, and now Turkey seem to have dampened investors’ confidence. Following new sanctions levied against Russia by the United States, Russian Prime Minister Medvedev threatened that Russia will consider U.S. sanctions a declaration of economic war. Meanwhile, U.S. threats against Turkey for refusing to release an American pastor added to Turkey’s economic crisis as the lira fell 14% against the dollar. And China has warned of a protracted trade war if the United States continues to add tariffs on Chinese goods.

All of which has affected the benchmark indexes listed here. In addition to the faltering Dow and S&P 500, the Global Dow fell almost 1.0% for the week and is down 1.28% compared to its year-end value. The tech-heavy Nasdaq held its own, while the small caps of the Russell 2000 climbed 0.80% and are ahead of last year’s closing value by almost 10%.

The price of crude oil (WTI) fell again last week, closing at $67.78 per barrel, down from the prior week’s closing price of $68.68 per barrel. The price of gold (COMEX) also dropped last week, closing at $1,219.30 by early Friday evening, down from the prior week’s price of $1,221.90. The national average retail regular gasoline price climbed to $2.852 per gallon on August 6, 2018, $0.006 higher than the prior week’s price and $0.474 more than a year ago.

Market/Index 2017 Close Prior Week As of 8/10 Weekly Change YTD Change
DJIA 24719.22 25462.58 25313.14 -0.59% 2.40%
Nasdaq 6903.39 7812.01 7839.11 0.35% 13.55%
S&P 500 2673.61 2840.35 2833.28 -0.25% 5.97%
Russell 2000 1535.51 1673.37 1686.80 0.80% 9.85%
Global Dow 3085.41 3074.54 3046.05 -0.93% -1.28%
Fed. Funds target rate 1.25%-1.50% 1.75%-2.00% 1.75%-2.00% 0 bps 50 bps
10-year Treasuries 2.41% 2.94% 2.87% -7 bps 46 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Economic Headlines

  • Driven by rising housing and vehicle prices, the Consumer Price Index rose 0.2% in July following a 0.1% increase in June. Housing prices rose 0.3%, accounting for nearly 60% of the CPI monthly increase. Transportation also increased 0.3% for the month and 7.3% over the last 12 months. From last July, the CPI has risen 2.9%. The index less food and energy also expanded by 0.2% in July — the same as in May and June. The index less food and energy rose 2.4% for the 12 months ended July; this was the largest 12-month increase since the period ended September 2008.
  • Prices at the producer level were unchanged in July after advancing 0.3% in June. Over the 12 months ended in July, producer prices have increased 3.3%. Producer prices for goods increased 0.1% in July, which was offset by a 0.1% decrease in prices for services. Prices less foods, energy, and trade services moved up 0.3% in July, the same as in June. For the 12 months ended in July, prices less foods, energy, and trade services climbed 2.8%.
  • The 2018 federal budget deficit continues to expand, outpacing last year’s deficit. The July deficit was $76.9 billion — about $2 billion ahead of June’s deficit. For the year, the deficit sits at about $684 billion, or more than 17% ahead of the budget deficit over the same period last year.
  • According to the Job Openings and Labor Turnover Summary, the total number of job openings ticked up to 6.7 million at the end of June — little changed from May’s total. Some sectors that saw an increase in job openings include education and health services, construction, manufacturing, wholesale and retail trade, finance and insurance, real estate and rental and leasing, and leisure and hospitality. Job openings fell in transportation, warehousing, utilities, and information. The total number of hires fell by less than 100,000 in June, while total separations increased by less than 100,000. Over the 12 months ended in June, hires totaled 66.6 million and separations totaled 64.1 million, yielding a net employment gain of 2.5 million.
  • In the week ended August 4, there were 213,000 initial claims for unemployment insurance, a decrease of 6,000 from the previous week’s level, which was revised up by 1,000. The advance rate for insured unemployment claims remained at 1.2%. The advance number of those receiving unemployment insurance benefits during the week ended July 28 was 1,755,000, an increase of 29,000 from the prior week’s level, which was revised up by 2,000.

Eye on the Week Ahead

This week investors will continue to focus on world events as they impact the U.S. economy. The July report on import and export prices may show the impact of the ongoing trade wars.

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Monthly Market Review – July 2018

The Markets (as of market close July 31, 2018)

Favorable economic indicators and encouraging corporate earnings reports helped propel stocks forward in July. Market growth has come despite trade wars between the United States and other trade partners, particularly China. Earlier in the month, the world’s two largest economies imposed tariffs of $34 billion on each other’s goods. Toward the end of July, there was hope of reopening negotiations between the United States and China in an attempt to diffuse the ongoing trade war. Domestically, the U.S. economy appears to be thriving. Over 210,000 new jobs were added in June, although wages have grown by only 2.7% over the last 12 months. Nevertheless, consumers are making more and spending more, while inflationary pressures on prices for goods and services remain in check.

Despite some periods of volatility, July proved to be a very good month for the benchmark indexes listed here. Led by the Dow, large caps, small caps, and tech stocks gained value over their respective June closing prices. Year-to-date, the Nasdaq is ahead by over 11.0%, followed by the Russell 2000, the S&P 500, the Dow, and the Global Dow, which is only 0.20% above its 2017 year-end value.

By the close of trading on July 31, the price of crude oil (WTI) was $68.43 per barrel, down from the June 29 price of $74.25 per barrel. The national average retail regular gasoline price was $2.772 per gallon on July 30, down from the June 25 selling price of $2.833 but $0.305 more than a year ago. The price of gold decreased by the end of July, closing at $1,232.90 on the last trading day of the month, down from its price of $1,254.20 at the end of June.

Market/Index 2017 Close Prior Month As of July 31 Month Change YTD Change
DJIA 24719.22 24271.41 25415.19 4.71% 2.82%
NASDAQ 6903.39 7510.30 7671.79 2.15% 11.13%
S&P 500 2673.61 2718.37 2816.29 3.60% 5.34%
Russell 2000 1535.51 1643.07 1670.80 1.69% 8.81%
Global Dow 3085.41 2979.52 3091.69 3.76% 0.20%
Fed. Funds 1.25%-1.50% 1.75%-2.00% 1.75%-2.00% 0 bps 50 bps
10-year Treasuries 2.41% 2.86% 2.96% 10 bps 55 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Month’s Economic News

  • Employment: Total employment rose by 213,000 in June after adding 244,000 (revised) new jobs in May. The average monthly gain over the last three months is 211,000. Total employment has grown by 2.4 million over the last 12 months ended in June. Notable employment gains for the month occurred in professional and business services (50,000), manufacturing (36,000), and health care (25,000). Retail trade, which had posted notable job gains in May, lost 22,000 jobs in June. The unemployment rate rose to 4.0% from 3.8%. The number of unemployed persons increased by 499,000 to 6.6 million. A year earlier, the jobless rate was 4.3% and the number of unemployed persons was 7.0 million. The labor participation rate edged up 0.2 percentage point over the month to 62.9%. The employment-population ratio held at 60.4%. The average workweek was unchanged at 34.5 hours for the month. Average hourly earnings increased by $0.05 to $26.98. Over the last 12 months, average hourly earnings have risen $0.72, or 2.7%.
  • FOMC/interest rates: The Federal Open Market Committee does not conclude its next meeting until August 1. It is possible that interest rates will remain the same following this meeting. However, unless economic circumstances change dramatically over the next several months, it is likely that rates will be increased twice more before the end of 2018.
  • GDP/budget: The second-quarter gross domestic product showed the economy expanded at an annual rate of 4.1%, according to the Bureau of Economic Analysis. The first-quarter GDP grew at an annualized rate of 2.2%. According to the report, consumer spending (personal consumption expenditures) surged, expanding at a rate of 4.0%. Net exports expanded by 9.3%. This is the first, or advance, estimate for the second quarter GDP. The next estimates, in August and September, will include more complete economic data. With only three months remaining in the fiscal year, the government budget deficit sits at $607.1 billion through June 30. Over the same period last year, the budget deficit was $523.1 billion — a difference of about 16%.
  • Inflation/consumer spending: Consumer spending, as measured by personal consumption expenditures, jumped 0.4% in June after climbing 0.5% (revised) in May. Core consumer prices, a tracker of inflationary trends, increased 0.1% in June. Core prices have increased 1.9% over the last 12 months.
  • The Consumer Price Index rose 0.1% in June after increasing 0.2% in May. Over the last 12 months ended in June, consumer prices are up 2.9% — the largest 12-month increase since the period ended February 2012. Core prices, which exclude food and energy, climbed 0.2% for the month, and are up 2.3% for the year.
  • The Producer Price Index showed the prices companies receive for goods and services climbed 0.3% following a 0.5% jump in May. Producer prices have increased 3.4% over the 12 months ended in June, which is the largest 12-month increase since climbing 3.7% in November 2011. Prices less food and energy increased 0.3% for June and are up 2.7% over the last 12 months. Prices for services moved up 0.4% in June.
  • Housing: Sales of existing homes continued to slow in June. Total existing-home sales fell 0.6% for the month after dropping 0.4% in May. Year-over-year, existing home sales are down 2.2%. The June median price for existing homes was $276,900, which is 5.2% higher than the June 2017 price of $263,300. Inventory for all types of existing homes for sale rose 4.3% in June — 0.5% above a year ago. New home sales regressed in June after climbing 6.7% in May. The median sales price of new houses sold in June was $302,100 ($313,000 in May). The average sales price was $363,300 ($368,500 in May). Inventory rose slightly in June to 5.7 months, up from the 5.2-month supply in May.
  • Manufacturing: Industrial production advanced 0.6% in June after edging down 0.1% in May. For the second quarter as a whole, industrial production advanced at an annual rate of 6.0% — its third consecutive quarterly increase. Manufacturing output increased 0.8% following a 0.7% drop in May. The index for mining rose 1.2%, its fifth consecutive month of growth. The output of utilities fell 1.5%. Capacity utilization, which estimates the potential for sustainable output for total industrial production, rose 0.3 percentage point for the month and is up 1.5% over the last 12 months. New orders for manufactured durable goods climbed 1.0% in June following a 0.3% drop in May.
  • Imports and exports: The advance report on international trade in goods revealed that the trade gap expanded by $3.6 billion in June, or 5.5%, over May. The deficit for June was $68.3 billion (the May deficit was $64.8 billion). June exports of goods fell 1.5%, while imports increased 0.6%. On a seasonally adjusted basis, June’s total imports ($210,263 billion) far exceeded exports ($141,931 billion). Prices for imported goods fell 0.4% in June, while export prices rose 0.3%. Over the last twelve months ended in June, import prices are up 4.3%, while export prices have advanced 5.3%. Overall, increasing tariffs don’t appear to be a factor in prices, at least for June.
  • International markets: European stocks got a boost from favorable corporate earnings reports and positive rhetoric emanating from a meeting between President Trump and European Commission President Juncker aimed at reducing reciprocal tariffs between the governing bodies. Japan and the European Union agreed to a free-trade pact that is targeted at reducing tariffs on Japanese automobiles and parts and European foods imported by Japan. The Chinese yuan has lost value compared to the dollar. Speculation is that the Chinese government is allowing its currency to weaken, lowering the cost of Chinese exports around the world, which may help offset the effect of U.S. tariffs on Chinese imports. Nevertheless, economic growth in China has slowed as a result of the tariff war with the United States.
  • Consumer confidence: Consumer confidence, as measured by The Conference Board Consumer Confidence Index®, gained some positive traction after dipping in June. According to the report, consumers’ confidence in the present economic conditions improved, but expectations for future growth were tempered.

Eye on the Month Ahead

The economy continues to show signs of strengthening despite trade wars, rising interest rates, and a stagnant real estate market. The labor market is expected to maintain its strong pace, while industrial production has been steady. Overall, August should see ongoing economic strengthening.

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